7.Dodge v[1][1]. Ford Motor Co..doc

Dodge v. Ford Motor Co. Ford Motor Company was incorporated in 1903 under the laws of Michigan with authorized capital stock of $150,000 of which $100,000 was then issued, $ 49, 000 for cash, $ 40, 000 for patents and $11,000 for other property. In 1908, the authorized and issued capital was increased to $ 2,000,000 by the declaration of a stock dividend out of accumulated profits. Thereafter its directors regularly declared cash dividends at the rate 60 percent per year on the increased capital of $2, 000, 000 and between December, 1911, and October, 1915, also declared additional special cash dividends from time to time amounting in all to $41,000,000. Thereafter no special dividends were declared exception of $ 2,000,000 declared on November 8, 1916, before the answers in the present case were filed, and Henry Ford, who controlled the board of director, had stated that no more special dividends would be declared at present and that the greater portion of the profits should be put back into the business in order to expand it, thereby increasing employment and selling a larger number of cars at a lower price per car. The surplus of the corporation at July 31, 1916, was $112,000,000 and it had cash and municipal bonds amounting to nearly $ 54,000,000. On November 2, 1916, the directors voted to expend $11,325,000 to erect blast furnaces and other plant in which to manufacture iron and other products for use in the manufacture of cars, and also $ 5,150,000 out of a program calling for $ 9, 895,000 for a substantial duplication of existing plant. Thereupon, two minority stockholders, owning one tenth of the companys stock, brought suit to compel the declaration of an additional dividend of not less than 75 percent of the accumulated cash surplus. The court ordered the declaration of a dividend of $19,275,385.96. Defendants appealed. Ostrander, J. . . . When plaintiffs made their complaint and demand for further dividends, the Ford Motor Company had concluded its most prosperous year of business. The demand for its cars at the price of the preceding year continued. It could make and could market in the year beginning August 1, 1916, more than 500,000 cars. Sales of parts and repairs would necessarily increase. The cost of materials was likely to advance, and perhaps the price of labor, but it reasonably might have expected a profit for the year of upwards of $ 60,000,000 . In justification, the defendants have offered testimony tending to prove, and which does prove, the following facts: It had been the policy of the corporation for a considerable time to annually reduce the selling price of cars, while keeping up, or improving, their quality. As early as in June, 1915, a general plan for the expansion of the productive capacity of the concern by a practical duplication of its plant had been talked over by the executive officers and directors and agreed upon, not all of the details having been settled and no formal action of directors having been taken. The erection of a smelter was considered, and engineering and other data in connection therewith secured. The plan, as affecting the profits of the business for the year beginning August 1, 1916, and thereafter, calls for a reduction in the selling price of the ears. In short, the plan does not call for and is not intended to produce immediately a more profitable business, but a less profitable one; not only less profitable than formerly, but less profitable than it is admitted it might be made. The apparent immediate effect will be to diminish the value of shares and the returns to shareholders. It is the contention of plaintiffs that the apparent effect of the plan is intended . . . to continue the corporation henceforth as a semi -eleemosynary institution and not as a business institution. In support of this contention, they point to the attitude and to the expressions of Mr. Henry Ford.My ambition, said Mr. Ford, is to employ still more men, to spread the benefits of this industrial system to the greatest possible number, to help them build up their lives and their homes. To do this we are putting the greatest share of our profits back in the business.With regard to dividends, the company paid sixty per cent on its capitalization of two million dollars, or $1,200,000, leaving $ 58, 000, 000 to reinvest for the growth of the company. This is Mr. Fords policy at present, and it is understood that the other stockholders cheerfully accede to this plan. He had made up his mind in the summer of 1916 that no dividends other than the regular dividends should be paid, for the present.”. . . The record, and especially the testimony of Mr. Ford, convinces that he has to some extent the attitude towards shareholders of one who has dispensed and distributed to them large gains and that they should be content to take what he chooses to give. His testimony creates the impression, also, that he thinks the Ford Motor Company has made too much money, has had too large profits, and that, although large profits might be still earned, a sharing of them with the public, by reducing the price of the output of the company, ought to be undertaken. We have no doubt that certain sentiments, philanthropic and altruistic, creditable to Mr. Ford, had large influence in determining the policy to be pursued by the Ford Motor Company-the policy which has been herein referred to.It is said by his counsel that: Although a manufacturing corporation cannot engage in humanitarian works as its principal business, the fact that it is organized for profit does not prevent the existence of implied powers to carry on with humanitarian motives such charitable works as are incidental to the main business of the corporation. In discussing this proposition, counsels have referred to decisions citations omitted. These cases, after all, like all others in which the subject is treated, turn finally upon the point, the question, whether it appears that the directors were not acting for the best interests of the corporation. There should be no confusion (of which there is evidence) of the duties which Mr. Ford conceives that he and the stockholders owe to the general public and the duties which in law he and his co-directors owe to protesting, minority stockholders. A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The direction of directors is to be exercised in the choice of means to attain that end, and does not extend to a change in the end itself, to the reduction of profits, or to the non- distribution of profits among stockholders in order to devote them to other purposes. As we have pointed out, and the proposition does not require argument to sustain it, it is not within the lawful powers of a board of directors to shape and conduct the affairs of a corporation for the merely incidental benefit of shareholders and for the primary purpose of benefiting others, and no one will contend that, if the avowed purpose of the defendant directors was to sacrifice the interests of shareholders, it would not be the duty of the courts to interfere. We are not, however, persuaded that we should interfere with the proposed expansion of the business of the Ford Motor Company. In view of the fact that the selling price of products may be increased at any time, the ultimate results of the larger business cannot be certainly estimated. The judges are not business experts. We are not satisfied that the alleged motives of the directors, in so far as they are reflected in the conduct of the business, menace the interests of shareholders. It is enough to say, perhaps, that the court of equity is at all times open to complaining shareholders having a just grievance. The large sum appropriated for the smelter plant was payable ove